Are New Rules Necessary for Mobile Payments?

Existing laws may not fully shield consumers from fraud and other losses stemming from their use of emerging mobile-payments systems, according to federal regulators.

The Federal Reserve, Consumer Financial Protection Bureau and Treasury Department are zeroing in on the technology as major financial-services players like Visa, MasterCard, J.P. Morgan Chase and a slew of tech firms like Google and eBay’s PayPal are rolling out phone-based payment services.

Some services allow a consumer to make purchases at merchants by tapping smartphones equipped with special chip technology against a payment terminal. Others let consumers send money to other consumers via text message or a mobile app installed on their phone.

While current laws governing the use of plastic credit and debit cards would cover consumers who lose their phones or incur fraudulent charges on their phone-based accounts, the involvement of nonbanking companies poses gaps in their ability to dispute charges and recoup losses, regulators testified Friday at a House subcommittee hearing.

Existing laws, such as the Electronic Funds Transfer Act and Truth In Lending Act, limit consumers’ liability if they experience fraud on their debit and credit cards. Because some “mobile wallet” services available today allow customers to fund virtual accounts with existing cards, those rules would still apply if a user lost their phone, witnesses said.

And while some nonbank entities, such marketers of prepaid cards, have adopted the protections voluntarily, they technically are not subject to the same rules.

The hearing, held by the House Subcommittee on Financial Institutions and Consumer Credit, comes as analysts are predicting an explosion in mobile-payment services. The value of worldwide mobile-payment transactions is expected to reach $617 billion by 2016, up from $171.5 billion this year, according to research firm Gartner.

Numerous “digital wallets” that allow users to store virtual versions of their bank cards and loyalty cards have been announced in the last year.

Google rolled out a service last year that uses a technology called near-field communication, enabling customers to make tap-and-go payments with certain Android smartphones. The service, Google Wallet, is currently offered by Citigroup, which allows its customers to load certain MasterCard-branded cards in to the software.

AT&T, T-Mobile USA and Verizon Wireless are pushing their own digital wallet called Isis that also will allow consumers to load bank-issued credit and debit cards in to the application. As with Google Wallet, the four main card networks – Visa, MasterCard, American Express and Discover Financial Services - have said they will support the service. Banks including J.P. Morgan and Capital One Financial said earlier this year they plan to test the service.

Independently, Visa, MasterCard and American Express are all marketing their own digital wallets, which aim to simplify how consumers pay for purchases on e-commerce websites as well as check out at brick-and-mortar merchants.